If you’d have bought shares in British American Tobacco PLC (LSE:BATS) in the middle of 2017 you’d have lost around half of your money (the reinvested hefty dividends notwithstanding). In the last year, the stock has been range-bound at a couple of quid above or below £27 a share.
The current price, £26.82, up 2.2%, values BATS at just eight-times this year’s earnings, falling to 7.5-times and then 6.9-times. That’s the bargain-bucket stuff.
This prices in the threat of competition from safer vaping-style products, regulation/litigation, Covid and more. On at least two of the foregoing three BATS is now on the front foot.
The world is returning to an altered normality post-pandemic, while the company’s next-generation products are starting to boom.
With net debt coming down below three-times underlying earnings (EBITDA), the company can afford to redeploy some of the cash it is generating.
There is no doubting what BATS boss Jack Bowles thinks the company should be doing with its excess funds – and it speaks to where the shares are currently languishing. “We recognise the clear value of a share buyback at the current valuation,” he told investors.
And remember, at the current multiples the stock is yielding over 8% with gentle increases priced in. In other words, BATS is becoming a cash machine (if it wasn’t already).
Investment-wise, the case for BATS is fairly compelling. Of the 19 banks and brokers covering the stock, only one is a ‘seller’; City sentiment is overwhelmingly positive towards the cigarette maker.
We used to refer to investments such as BATS slightly disingenuously as ‘sin stocks’.
The clue is in the name with British American Tobacco and all the baggage that goes with this multi-billion pound business.
So, while all the investment metrics are pointing the right way, BATS is often an emotive/moral proposition, or a philosophical one that’s reflective of where you stand on the issue of free will. And all of this accepts that the collective memory has been erased of the behaviour of the tobacco industry of decades gone by.
This is why tobacco stocks split investor opinion, and perhaps suggest why BATS may struggle to rediscover those halcyon days mid-2017 when the stock was trading around £56.